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BB&T Corp (BBT) Q1 2019 Earnings Call Transcript

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BB&T Corp (NYSE: BBT)
Q1 2019 Earnings Call
April 18, 2019 , 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation First Quarter 2019 Earnings Conference. Currently all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded.

And it is now my pleasure to introduce your host, Rich Baytosh Director, Investor Relations for BB&T Corporation.

Richard Baytosh -- Senior Vice President, Investor Relations

Thank you, Leanne, and good morning, everyone. Thanks to all listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer; Daryl Bible, our Chief Financial Officer; and Chris Henson, our President and Chief Operating Officer, who will review the results for the first quarter and provide some thoughts for the second quarter of 2019. We also have Clarke Starnes, our Chief Risk Officer to participate in the Q&A session.

We will be referencing a slide presentation during the call, a copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website. Before we begin, let me remind you BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this presentation that express management's intentions, beliefs or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

In addition, in connection with the proposed merger with SunTrust, BB&T has filed with the SEC a registration statement on Form S-4 to register the shares of BB&T's capital stock to be issued in connection with the merger, which contains the joint proxy statement and prospectus, that will be sent to shareholders of BB&T and SunTrust seeking their approval of the proposed transaction. Please refer to the cautionary statements on Page 2 regarding forward-looking information in our presentation, our SEC filings and the legends on Page 3 that relate to additional information and participants in the solicitation.

Please also note that our presentation includes certain non-GAAP disclosures, please refer to Page 2 and the appendix of our presentation for the appropriate reconciliations to GAAP.

And now, I'll turn it over to Kelly.

Kelly S. King -- Chairman and Chief Executive Officer

Good morning, everybody. Thanks for joining our call. So we think the first quarter was a bright start to the year and we had record adjusted EPS, strong returns, strategic loan growth, very good expense control and excellent asset quality, and very importantly a great strategic move in terms of our MOE with SunTrust, which I'll talk about in a bit.

Our net income was $749 million, up 0.5% versus the first quarter of '18. And net income excluding merger-related and restructuring charges was a record $813 million, up 6% versus the first quarter of '18. We did have diluted EPS, which was $0.97, up 3.2%, but we did wrap up our disrupt to thrive initiatives which you know , we've been working on for better part of the year-and-a-half. We wrapped that up this quarter and we did announce SunTrust MOE, so we had some substantial charges relate to that. So as a result, our first quarter adjusted diluted EPS was a record $1.05, which is up 8.2% versus the first quarter of '18. Adjusted ROE, ROCE, ROTCE are respectively were 1.55%, 12.01% and a very strong 19.86%.

I am on Slide 4 following the highlights, our taxable equivalent revenue was 2.9% (ph) , which was down 5.7% annualized versus fourth quarter, of course, remember some seasonality there. But I think a very good 3% increase versus the first quarter of '18. Loans held for investment averaged $148 billion, up 1.4% annualized versus the fourth quarter. Our reported NIM increased 2 basis points to 3.51% and our core NIM increased 4 basis points. Insurance income was very strong, a record $510 million, up 19.2% annualized versus fourth quarter, and Chris will give you some specific information of that in just a bit.

Adjusted efficiency was essentially flat at 56.6% versus 56.5%, which is, you know was very strong from an industry point of view and our adjusted non-interest expenses totaled $1.7 billion, which is down 4.7% annualized versus the fourth quarter. So we're doing exactly what we said in terms of maintaining extremely strong expense control.

Our credit quality was great, non-performing asset ratio was 0.26, flat versus fourth quarter and a decrease of 4 basis points versus the first quarter of '18. Charge offs were 40 basis points versus 38 in the fourth quarter with some seasonality impact there, but lower than the 41 basis points in the first quarter of '18. We did announced strategically our combination with SunTrust, which we were excited about, I will talk about that in just a little bit. And related to the merger we did suspend share repurchases in anticipation of the combination.

On Slide 5, you will see the merger-related restructuring charges I referred to, it was $80 million (inaudible) on our pre-tax, $64 million after-tax or an 0.08% negative impact on EPS from a GAAP point of view.

If you follow along on Slide 6, we look at loan growth. It is kind of interesting what's going on in loan growth side. Total loan growth was 1.4%, which is not super strong, but remember, we focus on the categories more than we do the aggregate. And our C&I was a strong 5.5%, CRE was down 7.5%, but that's really because of our focus on conservative underwriting. And so we actually feel good about that as we move through quarter with strong performance in Corporate Banking, Community Banking, Equipment Finance and Equipment Capital Finance. We did see a lot of competition in the market this year, I mean, this quarter, particularly in CRE, underwriting is really, really very competitive. And as I indicated we are simply not willing to go where some are with regard to CRE underwriting, and so that's why we saw the softness there.

Retail was, overall, strategically where we wanted it to be. Residential mortgage solid 3.5% annualized increase. Our direct was down 3.7%, but we are finally seeing the bottom that we have been projecting. We've been doing a lot of things in terms of restructuring our direct offerings and our processes, volumes are increasing. So we see that bottoming kind of as we expected. And then indirect was soft this quarter. But as you know, we always have that particularly driven by Sheffield. So overall we were pleased with loan growth for the quarter.

If you look at page 7, Slide 7 on deposits; total deposits were up 5.7%. Now we are seeing a shift here that we just want to mention. Our non-interest bearing deposits were down 10.9%, first to fourth annualized, now on a year-over-year it was 2.1%. So the 2.1% is the meaningful number to look at. And that's really not a function of losses to BB&T as much as it is movement between DDA to interest bearing account.

The market finally gotten sensitive to interest rates and so as we expected, we would see some internal and external disintermediation and that's occurring, although we're pleased that most of ours is just internal shifting. We think that will continue to occur, but probably at a decelerating pace that remains the same that we are on a whole new world in terms of how people are responding to. It is still relatively low interest rate environment, so we'll see how that works out. The percentage of noninterest-bearing deposits, total deposits was 32.7% versus 34%. So that reflects that softness in that. Overall, I would just say that our cost was a little higher, our betas was little higher this quarter. Daryl will give you some detail on that, but it was mostly because of substantial marketing effort that we had in terms of some markets that we were concerned about some market share dilution and so we ramped up our marketing-up since first quarter and we think that ramped back down as we had in the second and third quarter. So Daryl will give you little more color on that, but I just wanted explain, it was the beta increase, was not independent of the marketing strategic actions that we chose to make.

So with that let me turn it over to Daryl.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Thank you, Kelly, and good morning, everyone. Today I am going to talk about our excellent credit quality, margin and fee income dynamics, strong expense management and provide guidance for the second quarter and full-year 2019.

Turning to Slide 8; credit quality remained strong. Net charge-offs of $147 million were up 2 basis points and improved 1 basis point from a year ago. This quarter's increase reflects an uptick in CRE and seasonal revolving credit, offset by a decline in lease financing and the mortgage portfolio. Our NPA ratio of 26 basis points was unchanged and remains historically low.

Continuing on Slide 9; our allowance coverage ratios remained strong at 2.62 times net charge-offs and 2.97 times NPLs. The allowance to loan ratio was 1.05% unchanged from last quarter. The quarter provisions for credit losses of $155 million, which exceeded net charge-offs of $147 million. This resulted in an allowance build of $8 million in the first quarter.

Turning to Slide 10; the reported net interest margin was 3.51%, up 2 basis points. The core margin rose 4 basis points to 3.44%. The improvement was driven by dividends received and assets for certain post-employment benefits, which occurs in the first quarter of every year. This added 4 basis points to the margin. This dividend income is partially offset by higher personnel expense. The cost of interest bearing liabilities rose 13 basis points, a modest deceleration from last quarter's 14 basis-point increase. Balanced growth in time deposits and money market and savings through the interest-bearing liability costs higher. We expect the rate of increase in interest-bearing liability cost is significantly moderate next quarter. Asset sensitivity declined due to an increase in fixed rate assets and the decrease in DDA.

Continuing on Slide 11; Non-interest income of $1.2 billion grew 1.9% versus like quarter. However, our fee income ratio declined 50 basis points to 41.5%, as record insurance income was offset by declines in other fee categories. Insurance income increased $23 million reflecting seasonality and solid organic growth. Regions Insurance contributed $46 million to the insurance income. Excluding regions, insurance income rose 6.4% from the like quarter reflecting continued strong organic growth. Investment Banking and brokerage fees and commissions declined $28 million following a record fourth quarter of '18.

In addition, mortgage banking income decreased $23 million due to seasonally lower commercial and residential volumes. Service charges on deposits declined $14 million as there were fewer revenue days, but up 3.6% versus last year. Other income rose $18 million, primarily due to income on assets for certain post-employment benefits, which is offset by higher personnel expense.

Turning to Slide 12; our expense management continues to be strong. Adjusted non-interest expense which excludes MERCS (ph) , was $1.7 billion, a decrease of $20 million. Compared to the first quarter of '18 adjusted non-interest expense increased $30 million. However, excluding regions insurance this quarter's adjusted expense was about flat versus last year. Personnel expense declined $9 million due to lower salary expense with 518 fewer FTEs.

Professional services expense declined $12 million, primarily due to lower consulting expense. Merger-related and restructuring charges, increased $4 million, largely due to investment banking fees related to the merger of equals. You will note that the current quarter's effective tax rate was down. This is primarily due to excess tax benefits from equity-based compensation plans, which also incurred in the first quarter last year.

Continuing on slide 13; our capital and liquidity remain strong. Common equity Tier 1 capital increased to 10.3%, reflecting the suspension of share repurchases associated with the merger of equals. Our dividend payout ratio was strong at 41.3%. On April 5th, BB&T submitted a stand-alone capital plan to the effect, requesting a common dividend increase for the third quarter from $0.405 to $0.45 per quarter. We expect the Board to authorize this at the July Board Meeting. Our modified average LCR ratio was 130%.

Now let's turn to Slide 14 for -- to review our segments. Community Bank Retail and Consumer Finance generated net income of $379 million, down $8 million. Revenue decreased $46 million, driven by lower loan spreads and fewer revenue days impacting deposit service charges and a seasonal decline in payment related fees. Loan production decreased due to softer mortgage market conditions and seasonality at Sheffield. We rolled out a new branch, Direct Auto products in late February, reducing the timeframe for loan approval from over a day to just minutes. And just the first month we saw a 225% increase in loan production, which translates into an annual run rate increase of about $500 million. This is a great example of how being more responsive can improve client service and benefit the bottomline.

Continuing on Slide 15; Community Bank commercial net income was $328 million, down $1 million. Revenue decreased $14 million driven by fewer days and a slight decrease in loan spreads, offset by an increase in deposit spreads. Loan production declined largely due to seasonality.

Continuing to Slide 16; Financial Services and Commercial Finance net income was $156 million, up $1 million. Revenue decreased $40 million coming off record fourth quarter '18 investment banking and brokerage fees and commissions, for seasonally lower commercial mortgage banking income. Average loan balances increased 11.9% annualized driven primarily by corporate banking and C&I loans. Average deposit balances increased due to growth in wealth and corporate banking. Invested assets increased due to the recovery in the equity markets.

Turning to Slide 17, Insurance Holdings net income totaled $88 million, increase of $11 million. Total revenue increased $20 million due to seasonality. A seasonal pickup in employee benefit commissions was partially offset by a seasonal decline in P&C commissions. Organic revenue grew 6.7% versus like quarter.

Now I'll turn it over to Chris to provide more perspective on Insurance Holdings performance this quarter.

Christopher L. Henson -- Chief Operating Officer

Thanks, Daryl. Good morning. Probably purpose on these two slides really is to reinforce the transformation plan that you heard John Howard, Chairman and CEO, Insurance Holdings shared with you at Investor Day this past fall is really in stride and working. As a reminder, he brought BCG in about a year ago and really looked at the business order from top to bottom, developed the transformation plan, is now executing on 31 initiatives that fell out with the plan. We have out of that, new operating models for retail, for wholesale, we've got revenue growth and expense reduction initiatives, and result, the business really currently has significant momentum.

And if you will look at the upper right-hand chart, you can see that we're receiving strong results across all business lines. You can see revenues up linked quarter or like quarter 17.2%. And you'll recall, we did acquire Regions July 2nd of '18. So there's $46 million in revenues, Daryl pointed out, included in first quarter '18, but if you exclude that we still are up $33 million organically.

Just as a reminder, three primary drivers to organic growth. First is pricing, and we are in an environment where pricing is stabilizing in the plus 2% range. You'll recall, we have had two of the largest insurable last years over the past two years with $150 billion hitting in 2017, because of the large three storms and another $80 billion in '18. So we've got a good price support for this year.

Second driver of organic growth, and far and away the biggest impact is new business growth and our new business growth across all entities is up 8%, which is exceptionally strong and driven by really the strong economic environment.

And then the third is higher client retention rates. Our retail business retention rate is just below 92%, which is industry leading, and then wholesale 76%. As what that gives you is the chart at the lower left, and you can see a nice improvement in organic growth of 3% a year ago, up to 6.7%. We believe this is going to be best-in-class and believe when all the numbers come in at the industry, we'll probably average Q1 somewhere in the 4% to 5% range. So that said, the economic fundamentals are still favorable looking forward as business expanding and businesses of building equipment buying -- I mean, buildings buy an equipment, hiring employees does create insurable opportunities as we go forward. And so with that stability, there are still pockets of tightening in sort of commercial lines like energy, commercial auto, which is up in the neighborhood of 7% and pricing and then transportation industry would be examples.

If I move to Page 19, we can say with part of the reason for this plan was really continued focus on enhancing our margin across all the business lines. And you can see adjusted EBITDA on upper left hand chart there, up 38.6% year-over-year or $39 million, about a third of that would be from regions and the synergies from regions, we're on target to achieve about 80% of those cost savings in 2019. In addition, there's revenue lift in the numbers as well.

And then would -- of course, organic growth and strong expense control are driving a margin expansion. I mentioned new business growth is a primary driver of organic growth, but expense control plays a big role. We mentioned the cost takeout in Regions, but we've also got personnel savings really across all entities within insurance business, about every entity has an automation program going in and some also include robotics implementations. And so if you look at what that has driven in the lower left chart, you can see the EBITDA margin has moved over the last year from 22% up to 26.1%, which is really nice improvement.

So the focus in the business really is to optimize the operations, but with differentiation in data and analytics. And I would say, while that's true across the whole businesses, specifically driven wholesale, which is a harder to place covers in a riskier insurable opportunities where Daryl (ph) and his team are really offering the ability to help better understand through analytics, through risk and educate the underwriter on behalf of the client.

So in summary, very proud of the progress that's been made in the year. We've got another couple of years of implementation, but really pleased with where we are at this point, I'll turn it back to Daryl.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Thank you, Chris. Continuing on Slide 20, you will see our outlook. Looking to the second quarter, we expect average total loans held for investment to be up 4% to 6% annualized versus first quarter '19. Net charge offs to be in a range of 35 basis points to 45 basis points and the provision is expected to match charge-offs plus loan growth. We ourselves back both the GAAP and core net interest margins to be down 4 basis points to 6 basis points from the first quarter. Fee income to be up 5% to 7% versus like quarter and expenses to be flat to up 2% versus like quarter. And finally, effective tax rate of 20% to 21%.

Full-year guidance has not changed, but we have updated the effective tax rate to 20% from a range of 20% to 21% previously. We will continue to grow revenue faster than expenses, driving positive operating leverage as we move toward the MOE close with SunTrust.

In summary, the quality of our earnings this quarter was excellent resulting in record adjusted earnings, positive adjusted operating leverage versus last year, good loan growth, excellent credit quality and strong expense management.

Now let me turn it back to Kelly for an update on the merger of equals with SunTrust and closing remarks in Q&A.

Kelly S. King -- Chairman and Chief Executive Officer

Thanks, Daryl. So let me update you all on kind of where we are. As you know, we announced this combination on February 7th. And I would say that it is going extraordinarily well. Remember, we said that fundamental foundations for this is that it is highly synergistic, it is financially compelling and it is transformative, and everything we've seen in the last couple of months just affirms that to be true. Bill and I, and our teams are working together extraordinarily well. We started immediately having weekly meetings, we've already had eight weekly meetings, where we are reviewing and planning for the merger. Just this past week we had our first team building session at the BB&T Leadership Institute, which went extraordinarily well.

So we're making really good progress in terms of the teams working together. We are working through the process of pulling the organization together in terms of how it will operate when we actually combine. So we've named integration leads across businesses and functions. We have outside consultants working with us on this which is really, really helping. We're spending a lot of time focusing on risk oversight to make sure that we have that process nailed down very tightly. The merger applications and registration statement was filed in early March. We are working with Interbrand, a global leading brand agency to help us develop the new name and branding.

Our cultures are very similar. However, we are still planning a process to be sure that we pull the cultures together in terms of terminology and how we talk about ourselves, but the fundamentals we refresh -- in advance, that we're really affirm now, are really very, very similar. We are in the process of holding listening sessions from the community, community groups, individuals, probably really want to know what people have to say about this. We recognize this is a major combination. We recognize we have a major responsibility in terms of giving back to the community. Both organizations have done this as a matter of our more commitment to the marketplace, but we believe we can do even more. So that's very exciting, larger than four. We've got a couple of more to go.

Feedback has been very, very positive. So in terms of next steps, the FRB and FDIC actually hold their public meetings to get feedback. Those are being held in Charlotte on April 25th and Atlanta on May 3rd. We will be submitting our joint capital plan and stress test in May. We'll be continuing to name additional business leaders as we move down through the organization. We expect to announce our new brand and new name in late second quarter. We will be finalizing the divestiture commitments and undertake the marketing process as we head into the second quarter and then the shareholder vote is expecting in the early third quarter.

We remain very confident in our projected $1.6 billion net cost savings, remember that is net of technological investments and HR expenses. So that is going very, very well. So in terms of our quarter, it was overall, I think, a very good quarter. We're extremely pleased about our progress, also and we're working toward creating the premier financial institution. So a great quarter, outstanding strategic combination, announced with the combination with us and SunTrust. And it really positions us to drive in a really challenging environment. So we can continue to focus on making the world a better place to live and focusing on leading other way to financial well being.

So with that I'll turn it back to Rich.

Richard Baytosh -- Senior Vice President, Investor Relations

Thank you, Kelly. Before we start the Q&A session, we recognize there will be lot of interest in getting an update on the merger planning and what's happened since the announcement of February 7th, as well as our current expected timeline for things to unfold from here. So we'd like to have the Q&A be a balance of questions about our stand-alone BB&T results and trends in the first quarter and merger questions. Leanne, at this time, if you come back on the line and explain how our listeners can participate in the Q&A session.

Questions and Answers:

Operator

(Operator Instructions) Please limit yourself to one question and one follow-up question. (Operator Instructions). And we'll take our first question from John McDonald with Autonomous Research.

John McDonald -- Autonomous Research -- Analyst

Hi. Good morning. Just wanted to ask about, just on the stand-alone BB&T question, it feels like there are some crosscurrents on the net interest income outlook, Daryl, with loan growth picking up, but the NIM seeing some pressure. So I guess the question is what's the source of the 4 basis points to 6 basis points of NIM pressure next quarter if the deposit betas are going to slow? And how do the NIM and loan growth dynamics feed into your NII growth outlook for 2Q and the full year?

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Yeah. So this quarter, John, just like we have in other years, we have to record an entry and net interest income. It's basically in our deferred comp plans and it's the earnings that are generated out of the funds that are invested, and on the dividend that we received. This quarter it was $18 million. If you go back a year ago, it was $12 million. So last year it was -- were 3 basis points, this year 4 basis points that basically just comes out of net interest income. With the loan growth that we're projecting across all major loan categories, even though margin will be down, we still expect net interest income to be up in a linked-quarter basis between first and second, we do benefit by an additional day, so that helps. But if you look on a year-over-year basis, we still are expecting our net interest income year-over-year to be up in the 2% to 3% range. So still positive revenue even with this margin guidance.

John McDonald -- Autonomous Research -- Analyst

Okay. Great. And then in terms of the MOE, as you've dug deeper into the financials, how's your view of the initial projection of earnings power change if at all, on announcement day you showed an illustrative 2021 EPS of $5.59? Just kind of wondering what type of refinements positive or negative you might have made to that. I know the S4 came out and showed, for example, higher amortization on the one hand, but also higher purchase accounting. I know it's early, but any refinements you make to that initial crack of combined earnings power?

Kelly S. King -- Chairman and Chief Executive Officer

John, I'll give you a broad answer and then Daryl give any detail if you like, but no -- nothing in aggregate, that you said, in a large combination like this, there are puts and takes. You get more detail, more specificity in terms of some of the projections which early on, as you know, are necessarily broad based and assumption based. But we are two months into it, and I would say in terms of the aggregate, we feel as confident as before, if not tad more confident. The combinations of the businesses, now that we've learned more, leave us very encouraged in terms of the complementary nature of these businesses.

Remember the big levers on this are the expense control. We feel very good about that. But the long term enduring benefits are around, cross levering the benefit -- especially focus is on SunTrust over BB&T and BB&T over the SunTrust. And more we've learned about, we feel about that, I would say, net positive.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Yeah. I would just reiterate that, John. So we talked about five major categories where we would achieve the savings; facilities, retail, third-party vendors, technology and shared services as we have met as a new co management team and we talk about these, we feel extremely confident that we can achieve the $1.6 billion net number. We are in the process of getting more information and detail as our companies come together, so we can plan to basically allocate by all the business lines. So they will be held accountable for the savings and still believe that we are very confident in achieving the net savings of $1.6 billion.

As far your accounting question goes, we really don't know what the rate environment is going to be when we close the transaction. We look in at late third quarter or fourth quarter close. So interest rates will have some say on what their potential mark on our portfolio is, it's probably less now with rates down a little bit, but I'm not sure which way rates are going to go across the curve by the time we close. We will basically be reporting both GAAP and cash earnings for the foreseeable future, because we're going to have a lot of non-cash expenses. Recall non-cash expenses still fall to capital. So it is very accretive from a capital usage perspective, but we feel very confident in the projections that we gave a few months ago.

John McDonald -- Autonomous Research -- Analyst

Okay. That's very helpful. Thank you.

Operator

And we'll take our next question from Betsy Graseck with Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Analyst

Daryl, just on the capital comments that you just made, can you give us a sense as to how you are thinking through the combined capital position that you have? I mean, what does it mean for capital return over the next couple of CCAR cycles? And I know part of that answer has to come with an assumption that NPR that's out there is approved on advance to purchase banks, but maybe give us some color on if it is or if it isn't?

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Sure. Yeah, so as we put that the two balance sheets together, we will have purchase accounting mark, what we said two months ago is that the capital ratio should be between 9.75% and 10% and we would start capital actions in the amount of share repurchases once we achieve a 10% CET1 ratio. That's still the plan right now. We want to make sure that we get through all the conversions and conversions going to take probably one to two years. We want to make sure our earnings get to that really high levels that we can achieve that we have out there projected. At that point, then we'll revisit the leverage and capital of the Company. But the combination of these two companies should be leading industry capital generation at the end of the day, which will help bolster our overall returns and our returns back to the shareholders.

Betsy Graseck -- Morgan Stanley -- Analyst

So are you suggesting that capital return will be on hold until the conversions are done? I just want to make sure I understand that?

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Though we will basically -- this is, obviously, the Board has to approve this, but when we approve the transaction both boards said that we wanted to get our capital ratio, CET1 to 10% and then at that point we would do share repurchases.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay.

Kelly S. King -- Chairman and Chief Executive Officer

And Betsy, remember that it's a multifaceted sort of variables that we have to consider and the Board has to consider, the progress with regard to the merger of our combinations in terms of systems, et cetera. But we also had to pay attention to what's going on in the economy and in global geopolitical issues and all of that. And so for all of those reasons were being admittedly conservative when we say 10% and there certainly is some upside opportunity with regard to capital utilization as we go forward.

But as you know we are conservative, and we're going to be careful as we go through this, because there's so much earnings power in this organization. As we go forward we will be able to provide extremely good returns in my view for our shareholders. But it's important not to rush it in terms of over leveraging the Company in the beginning.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

I mean, even at 10% CET1 ratio, we will have leading industry return on tangible equity.

Kelly S. King -- Chairman and Chief Executive Officer

And the target is 22% Betsy, would that be satisfactory?

Betsy Graseck -- Morgan Stanley -- Analyst

No. 22%, 22.5%, so I hear 22.5%. Okay. No, that's helpful. Okay. And so it really doesn't matter if the NPR goes through or not, your 10% is your 10%?

Kelly S. King -- Chairman and Chief Executive Officer

Yes.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Yes.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. All right. And then just separate question on the net cost saves that you've talked about. I know that's on a net basis, what are you thinking about disclosing, what your expectations are for the gross investment to get those net cost saves at some point, when do you think you'll be communicating that to the Street?

Kelly S. King -- Chairman and Chief Executive Officer

So Betsy, we still are putting together the plans as you would expect and time that figure out what the net savings will be, what will be the investments in terms of innovation and technology. So we gave you a good broad number. We will be refining that as we go forward, but it's a bit early, to be honest, (inaudible) exactly what their branch savings cost would be, exactly what the investments and innovation would be. But they are going to stay. We are confident with at least a $1.6 billion and we're confident that allows us to make the kind of investments we talked about in terms of leaning forward with regard to innovation and technology investments, because that's really the juice in this thing basically.

I mean, it's the call side play we get that, but that's not what we're really focused on. And we are focused on positioning ourselves to be a leader in terms of innovation and technology, so that we can compete effectively with the largest institutions in the country. And we believe there's enough economics in this to allow us to make those kind of investments from a long-term point of view and still generate robust returns to our shareholders.

Betsy Graseck -- Morgan Stanley -- Analyst

Got it. Okay. So TBD and you let us know when you are there. So that's -- I appreciate that. Okay. Thank you.

Kelly S. King -- Chairman and Chief Executive Officer

Thank you.

Operator

And we'll take our next question from Mike Mayo with Wells Fargo Securities.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi. Since the merger, BB&T stock has performed only in line with the Bank Index and has underperformed the S&P 500. It seems that one issue is cultural risk. Kelly, you just said that the cultures are similar, but they certainly are not the same. So the question is what are the cultural differences, and how do you bridge the gap?

And I'd highlight three areas. One would be the structure. It seems that BB&T runs relatively more by hierarchy than SunTrust, so how you get team A plus team B to create a new team C? Two would be engagement of employees, you've mentioned retention packages, but we all know that people can quit without leaving. In other words, how do you get their hearts into the job? And three would be the CEO risk, I get it that you and Bill are all smiles, you love each other, everything is great, but how will you handle it during times when you don't agree? I mean, my wife and I got married and it was all great, and then we had disagreements like your socks are on the floor, so would be able to confront that, I was, that's the only -- that I (inaudible) good my wife. And I bet, you're going to have times you disagree, I think it's -- that seems to be important how you're going to get along during those times than during this kind of engagement or honeymoon period?

Kelly S. King -- Chairman and Chief Executive Officer

Well thanks, Mike. I mean, I think that is the kind of the heart and soul of the issue. I would say that I feel really good on all those, but let me be direct. With regard to your positioning that BB&T is more hierarchical. I will disagree with that. When you really look at these two organizations, and now we've lived closer together for eight weeks. I know there's not like 25 years, but it's been a pretty involved eight weeks, and Bill and I have known each other for long time. I really think when you get into it, Mike, there's not any substantial difference. We are both are focused on empowering our associates and leading from principle, leading from purpose, leading from mission and so when you really get into it, I have not been able to find any kind of difference in terms of hierarchy, in your words that you might choose to use with regard to that.

In terms of our associates, which is the most important. We feel really good about that. We've had very little, very, very little loss of associates at this point. And yes, we are using retention programs, et cetera, but much more importantly, Bill and I agreed day one that we are not taking anything for granted. And we're not expecting our associates to just lineup and be good soldiers. We take the responsibility and all of our team does to rerecruit every day. And so we are recruiting our associates to remain a part of this team for the purpose of being a part of something is very exciting, very dynamic. It's an organization that has and can continue at an enhanced basis, be a very good place to work. I mean, it can be a place where you can find your way for your purpose in life and align it with an organization that is deeply committed to purpose and way and making a difference in the world and leading the way to financial well-being. I mean, all of that, in these two organizations, is extremely consistent.

And I think, it's going to be kind of hard to find somewhere if there's any better and hard to find in many places that are as good in terms of just pure opportunity. I mean, I've told some people, I was 40 years old like gentlemen. This is just so exciting in terms of thinking about where this organization can go, but not just economically. I'm talking more importantly in terms of the contribution we can make to the world and that we can truly help our clients achieve economic success, financial security. We can really -- we have a fantastic associate benefit and value program and we can enhance it. We're working really hard with our communities to even enhance an already outstanding community involvement program. And so there is no meaningful difference in terms of how we do business. Our associates get that and I don't expect to see any substantial reasons to leave, whether you're talking about technical or not or mostly about having the heart and soul into the game.

When I'm talking to our associates, and I'm getting feedback from the SunTrust associates and Bill telling me the same thing, they are genuinely excited about this . They recognize we're putting together two great companies that can forge an opportunity for all of us to have a lot of fun, make it lot a better place to be and do some good stuff. Get up in the morning, decide about coming to work, that's what we're trying to do.

The CEO is, what -- and everybody talks, Mike, a lot about that, Bill and I getting on great. We've known each other a long time. We're both, as I say, North Carolina boys, although he has been based all of his career in Atlanta. But look, I've spent a lot of time in Atlanta too and there is no material difference between Georgia and North Carolina. We're all from kind of the base root cultures and we get along great. We're both kind of really, really purpose-driven individuals, we're both achievement-driven individuals, we're both deeply committed to our communities and our associates, and while you might find slight differences in terms of our personalities. I really think we are an awful lot of like and I know we've got to work on our fist pumping, we've been practicing that. But other than that there is no material difference between Bill and I, and we're working together great.

Mike Mayo -- Wells Fargo Securities -- Analyst

So just one follow-up. Where do you think the stock market has it wrong. You've gotten zero credit in the stock market for your merger despite the synergies based on the in-line performance with the Bank Index. Almost every investor that I speak with brings up the cultural risk, the differences in culture. Where do you think the stock market has it wrong when they are evaluating this aspect of the merger?

Kelly S. King -- Chairman and Chief Executive Officer

So, Mike, I've been through one large MOE all that was, it was 20 plus years ago, but these two were similar. And I am saying the same thing here that we saw, then the stock market doesn't have it wrong. The stock market just kind of as prudent and I don't blame them for that. I think the smarter ones will take a bit of a more of leap of faith and trust, experience that Bill and I've had over all these years and I've been at it 47 years, he's been at it like 39 years. We are not like just starting out. So I think the smart investors will recognize it, but they all find a high probability to a successful venture and they'll invest early. Those that are more conservative will lay back and wait for us to prove that.

It kind of doesn't add on me, I'm not interested in short run results. I'm not interested in short term pops at the stock. My commitment, Bill's commitment to long-term for shareholders is to produce a good, steady, less volatile long-term growing TSR and that's exactly what we're going to do.

Mike Mayo -- Wells Fargo Securities -- Analyst

And then last quick follow-up. Are you -- it's -- are the SunTrust exactly is going to go through the BB&T Leadership Institute or we enjoyed that Investor Day that you had for us there, but how will that play a part in the new firm?

Kelly S. King -- Chairman and Chief Executive Officer

Yes, I was glad you were there, Mike. And we were actually there last week, you may appreciate, we spent a day- and-a-half have over there last week with our new executive team. We have -- we will have multiple leadership team building sessions going forward. And all of the SunTrust executives have committed to go through, and excitedly committed they go through. They loved it, and frankly, and may feel really good. But, yeah, they're definitely going to be going through that and we'll be doing things together. So the Leadership Institute is a powerful organization in terms of helping people grow individually and as teams. And so far, I would say, there's a 150% commitment to working together in those types of endeavors.

Mike Mayo -- Wells Fargo Securities -- Analyst

All right. Thank you.

Kelly S. King -- Chairman and Chief Executive Officer

You bet.

Operator

And we'll take our next question from Erika Najarian with Bank of America.

Erika Najarian -- Bank of America -- Analyst

Hi. Good morning.

Kelly S. King -- Chairman and Chief Executive Officer

Good morning.

Erika Najarian -- Bank of America -- Analyst

You were even pretty explicit about the purchase accounting adjustments on the loan side, but Daryl, I'm wondering if you could give us a better sense on the mark-to-market accounting that we could expect on the pro forma balance sheet on the securities and on wholesale funding and also is there any flexibility to optimize the yields and the cost?

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Yes. That's a great question, Erika. Being a former Treasurer, this is a once in a lifetime opportunity when the two companies come together. We're basically going to have half the balance sheet mark-to-market. So as that gets closer, our Treasurer and executive management will decide if we need to adjust the interest rate risk profile or if we need to change some of the asset classes or mix of what we have and everything, half the balance sheet will be available to basically to buy or sell at that time or change position.

So I would view that as a huge opportunity for us and position us for the future. So I think as the time gets closer to when we know, we're going to close, we'll be able to give you more color on that, but I think this is a just an unbelievable opportunity for somebody to really position the Company forward from that perspective.

Erika Najarian -- Bank of America -- Analyst

Got it. In your S4, you noted that the $3.5 billion fair value adjustment, $3 billion of it was for credit and the rest 500, about $500 million was for interest rates and other mark-to-market adjustments. I'm wondering if you close the deal in 2019, if SunTrust's loan portfolio does better, then it runs with better than the 2% loss rate, could you continue to reclassify that $3 billion or the PCI or non-accretable yield to non-PCI or accretable yield and this CECL change any of this, even if you close in 2019.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Yeah. So when we came up with, the credit mark on the SunTrust portfolio was 2% and Clarke and I still agree that's the appropriate number as we get in and look more at it. We did hire a third party to help us with the valuation methods for the whole balance sheet and that is going on and that is not completed yet that will probably be completed in the next couple of months. But from the closing the transaction in '19, we'll have the typical PCI amount of loans and then with the rest we'll have a fair value mark and when we adopt CECL in 2020, we know that PCI loans and some of the other loans will be reclassified into PCD and then that we will allocate a life-of-loss, a CECL reserve to the remaining SunTrust and BB&T loans at that point in time.

So in essence, if you look at just the SunTrust loans from a good book perspective you will have a discount amount on there that will accrete (ph) your income plus you will have a life-of-loss reserve with CECL. So from that perspective, I would say the loan portfolio will be more than adequately cover. It's kind of really audit accounting. We have a comment letter into FASB, and I think some of other banks that have done deals recently have comment letters in the FASB. But that's the way we understand the accounting now is how it's going to play out.

Erika Najarian -- Bank of America -- Analyst

Got it. Thank you.

Operator

And we'll take our next question from Matt O'Connor with Deutsche Bank.

Matt O'Connor -- Deutsche Bank -- Analyst

Good morning. Daryl, back in Investor Day you talked about running down the securities book and using that to fund loans. You got the securities relatively flat on an average basis versus last quarter. And understand that you can kind of reposition us from the deal closes, but what's your thought process between now and then in terms of the securities book?

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Yeah. I really like to get clarity on the NPR and tailoring, Matt. I mean, assuming that we stay at 70% LCR or go to 85% that's really going to dictate how much securities we need. But we have the advantage that both of us have capacity at the Federal Home Loan Bank. So we can do letters of credit there, and we can also pledge to public funds to kind of optimize the balance sheet from that perspective. But I wouldn't anticipate us changing our investment portfolio right now until we get approval from the proposed NPR that's out there, right.

Matt O'Connor -- Deutsche Bank -- Analyst

Okay. And then, just to circle back on some of the discussion about the cost saves and the investments, get us more information down the road, do you guys have an estimate on when we might get more details on what's driving the cost saves beyond just a couple of the bullet points from the numbers behind it, do you just have a sense of when you'll have that information for us?

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Yeah. I would say, we will continue to work on that as we put the two companies together. We have financials. We have more clarity. We are in the midst of selecting the layers of management from executive management and down, that will create some cost savings from that perspective. Just because you got duplications in a lot of business managers from that perspective. So that will kind of start where some of the savings are, but it's going to really evolve over time. We really aren't looking at and can't really look at any vendor information until we close the transaction due to antitrust. So that's just out there at a very high level and as branch systems come together, and we'll have some branch closures, we have more color on what those savings would relate to. Shared services; there's a lot of overlap on shared services as business models are selected and locations are selected, that's going to impact closures on those areas and facilities.

So I think there is a wealth of areas that we'll be able to piece together to achieve a net $1.6 billion number that leave enough for technology and other investments in the Company. So we think we can handle industry leading profitability returns as well as still increase and ramp up our technology investments in the Company.

Okay. All right. Thank you.

Operator

And we'll take our next question from John Pancari with Evercore ISI.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Kelly S. King -- Chairman and Chief Executive Officer

Good morning, John.

John Pancari -- Evercore ISI -- Analyst

On the stand-alone side, on the loan growth, wanted to see if you can give a little bit of more color around your outlook, what gives you the confidence in the 4% to 6% linked quarter annualized trend that you can see in the second quarter where you're seeing the greatest strengths and acceleration in production? Thanks.

Clarke R. Starnes -- Senior Executive Vice President and Chief Risk Officer

Hey, John, this is Clarke Starnes. We have to remember, we did have defined seasonality in the first quarter. So you saw that particularly in our indirect businesses, so such as our own Sheffield portfolio, our Premium Finance, our Mortgage Warehouse Lending. The projections right now, as you will see that bounce back nicely in the second quarter. We anticipate we're going to have good mortgage lending growth and also very strong overall C&I. So those would really be the drivers. And based on those dynamics around seasonality and what we see in the pipeline and now we're going to book, we have a lot of confidence, we will get the number.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

I think we're forecasting every category to be a [1:03:57] fine (ph) quarter but CRE, so with across the board contribution like.

John Pancari -- Evercore ISI -- Analyst

Got it. Okay. Thanks. And then separately on the combined basis, I know you had indicated that there -- more broadly no big change in earnings power expectation per John's question, but also want to see, can you talk specifically about your 51% combined efficiency ratio expectation as well as the 22% return on tangible common equity expectation. Any change to those given the backdrop, the rate environment, et cetera.

Kelly S. King -- Chairman and Chief Executive Officer

No, John, we don't see any changes based on everything we see now. Those numbers were derived mathematically based on reasonably conservative assumptions and that's when we see today or looking forward change the fundamentals of those assumptions.

John Pancari -- Evercore ISI -- Analyst

Got it. Okay. Thanks, Kelly.

Operator

And we'll take our final question from Ken Usdin with Jefferies.

Ken Usdin -- Jefferies -- Analyst

Thanks. Good morning. One more merger related question, Daryl, as we think ahead to the closing quarter and that one of the toughest things is always a kind of range the -- what ending up NIM looks like and granted that there'll be some differences as you already mentioned about the -- where the purchase accounting ends up, is it -- give a general understanding of how we should think about like what the pro forma NIM looks like given that you guys are at 3.50-ish or so, and SunTrust is in the upper 3.20s, plus any [1:05:35] PA (ph) or credits or stuff to help us with that starting point? Thanks.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Yeah. And so we're going to be reporting both the core net interest margin and reported or GAAP report and net interest margin. And there will probably be a wide variance between the two, because you're marking to market, basically half the balance sheet. And we'll give you more specifics as we get closer, but our core margins overall, should be pretty much simply just put in our two margins together today, so 3.30s plus or minus, would probably be good ballpark number.

But as far as the reported GAAP margin there is a lot of puts and takes in there, and then we'll give you a lot of color and a lot of tables and basically disclose how all that stuff play out, because it will be complex as we put the two together. And we just have to be very transparent with you and show you what -- how it's going to work, and just how it's going to run off over time from that perspective. As I said earlier though, earlier question, we will have the opportunity to basically reposition the balance sheet if we want to do that at some point, and that could potentially help and drive core margin at that point, but it's too early to know that right now.

Ken Usdin -- Jefferies -- Analyst

Okay. Understood. And then back to the core question, Kelly had mentioned the ongoing migration out of non-interest bearing to interest bearing trend we're seeing at a lot of banks, now that the rate [1:07:02] (inaudible) presumably has stopped and how do you-I know you said that you expect that mix to continue, but what are you seeing and hearing in terms of the ongoing pressures on interest bearing deposit costs and the push and pull between growing deposits versus having to pay up for them? Thanks guys.

Kelly S. King -- Chairman and Chief Executive Officer

So I think, Ken, that having watched these things over a number of cycles, here the spurts -- where everybody can't account on price insensitive for a while and then they look at it and then they become price sensitive and there's a spurt of time, 60, 90 days, where they are much more sensitive and then they kind of go back to running their business they are doing and they are not essentially. So you kind of go ebb and flow. What I think is that we just saw over the last 90 days, so a spurt of insensitivity. But with rates stable or just back down now, I think it can probably going to move into. You won't go back down in terms of sensitivities, but mostly you rise up in sensitivities. That makes sense. So I think you will see less focus on betas and moving money around over and [1:08:13] (inaudible) period of time, then you say, nevertheless 90 to 120 days. Now there's a dramatic shift in rates one way or the other, that will change that, but nobody expects that also and I respect that. So I think you get ready to go into a period of less price sensitivity focus in terms of moving money around.

Ken Usdin -- Jefferies -- Analyst

Got it. Thank you.

Kelly S. King -- Chairman and Chief Executive Officer

Thanks.

Operator

And that does conclude our Q&A session today. I would now like to hand things back over to Rich Baytosh for any additional or closing remarks.

Richard Baytosh -- Senior Vice President, Investor Relations

Okay. Thank you, Leanne, and thanks everyone for joining us today and hope you have a great day. Thank you.

Operator

And that does conclude today's conference. Thank you for your participation, you may now disconnect.

Duration: 60 minutes

Call participants:

Richard Baytosh -- Senior Vice President, Investor Relations

Kelly S. King -- Chairman and Chief Executive Officer

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Christopher L. Henson -- Chief Operating Officer

John McDonald -- Autonomous Research -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Erika Najarian -- Bank of America -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

John Pancari -- Evercore ISI -- Analyst

Clarke R. Starnes -- Senior Executive Vice President and Chief Risk Officer

Ken Usdin -- Jefferies -- Analyst

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